SME Exchanges: Big change for India biotech?

The small and medium enterprises exchanges by the country's leading stock exchanges could prove to be a game changer for healthcare and biotech sectors

Lack of visibility of small companies led to the need for smaller exchanges

India's leading bourses National Stock Exchange and Bombay Stock Exchange launched their separate platforms for small and medium enetrprises, Emerge and BSESME, respectively, on March 13, 2012. This was a long awaited move following Securities and Exchange Board of India (SEBI) laid down the framework for such a trading platform in 2008 and detailed guidelines in May 2011. Both the exchanges are going to run based on these guidelines. Since their start, both Emerge and BSESME have had one company each listed on their platforms. With the launch of such an exchange, India joins the league of other countries, such as the UK (Alternate Investment Market or AIM), China (Chinex), Hong Kong (Growth Enterprise Market or GEM) and Japan (Market of the high-growth and emerging stocks or MOTHERS) with similar exchanges.

Termed to be drivers for today's entrepreneur driven economy, SMEs are said to contribute 40 percent of exports employing over 60 million people according to the SME Chamber of India. For a group that contributes over 17 percent of the GDP, adequate support from the government is rightfully warranted. Hence in the latest budget, a corpus of approximately 906 million (Rs 5,000 crore) has been allocated for the Small Industries Development Bank of India (SIDBI). Industry experts hope that a significant portion of this is reserved for the healthcare sector.

The need for the exchange rose primarily from the want of good visibility for smaller companies. Mr Ravi Tyagi, head, Emerge, NSE Exchange, explains the difference. "In the former (the main board), there are larger companies that are mature with around 1,00,000 investors and small companies tend to get lost. At an SME exchange, the issues are smaller. Also, the risk is higher and there is more uncertainty. However, the people who invest in such companies are generally those who are well-informed and resourceful, and interested in investing in such fast growing companies."

What does it mean for biotech?

The growth of the biotech industry, though replete with expectations a decade ago, did not translate into a lot of initial public offerings (IPOs) for a variety of factors. In fact, barring a few companies such as Biocon, Zydus Cadila, Suven Life Sciences and Camson Biotech, very few biotech companies have gone the IPO way to raise money. "Biotech companies in India have failed to scale up and get to a size where they can be potentially listed and attract capital market attention," says Mr Nitin Deshmukh, CEO, private equity, Kotak Investment Advisors. Mr Deshmukh adds, "There was a lot of build up that happened after Biocon's listing in 2004, but somewhere the hype has failed to deliver. That is why capital markets and investment bankers have not been very receptive to this industry. There are very few investment banks who are investing in this sector."

The ability to sustain growth throughout has been vital for the success of any company to have a successful fund raising experience at the stock markets. Mr Dhirendra Kumar, founder and CMD, Camson Biotech, talks about his experience of getting listed on the main exchanges. "For a company such as ours, we had very few options for private equity funding. Not many wanted to invest in research and development. There was a huge difference in our revenues after getting listed. We opened at Rs 180 at a face value of Rs 10 in 2008 at the BSE. Today, raising funds is not a serious issue anymore. Also, since bioagri is not very equipment-intensive compared to other sectors, scaling up is not as difficult."